A Reminder Of What Really Drives Hong Kong Property Prices

There have been debates on what drives property prices in Hong Kong for more than a year as property prices rose to a new record after the 1997 crash. Many said that low interest rate causes the rise in property prices, some blame rich folks from the Mainland China for bidding up prices here. Many also said there is supply and demand imbalances. Are they true?

It is true that Hong Kong is a small city with awful lot of people, but only a very small fraction of land are actually developed, because there are hills all over Hong Kong, and not enough flat land. Also, as the former British colony was going through the transition of transfer of sovereignty, the Chinese and British governments agreed that the British Hong Kong government will only sell a maximum of 50 hectares a year since 1984 to 1997 (see clause 4). During one of the biggest boom period in Hong Kong economy, with restricted supply as per the joint agreement, property prices went into the epic rise until 1997, when the bubble went bust.

The first Chief Executive of Hong Kong Mr. Tung Chee-hua thought that the government should supply more land to curb property prices. He proposed to supply 85,000 units of residential housing (private and public sector combined) per year to curb property prices. The reality is the property bubble burst even before any parts of such plan were implemented. Although there were never really 85,000 apartments being supplied each year, the supply nevertheless rose. In private sector, just after the bubble burst, the private sector housing completion rose from 14,700 units from 1997 to above 20,000 units for six years since 1999. It was not until 2003 when the government decided to left the property market to their own device. The supply in housing units dropped each year since 2003 to the only 7,000 units forecasted figure in 2010.

Housing Completion (Units per year) Source: HK Government

Could this great drop in supply cause the recent rise in property prices Let's look at two other variables. The first is population growth.

Population growth Source: HK Government

The second variable is median household income.

Median Household Income Source: HK Government

Here are some chilling facts: the population growth of Hong Kong has been steadily decline, and now it barely grows; and the median household income today is exactly where we were 10 years ago. The first chilling fact begs the question of why should Hong Kong need more apartments built if population barely grows, all else being equal? The second chilling fact begs the question of why should property prices rise if income barely grows, all else being equal? In some way, the last ten years were really Hong Kong's lost decade, weren't they?

The final set of charts makes it quite obvious that after 2003, a rapid rise in property prices almost always follow a rapid increase in money supply. In 2003-2004, the M1 growth is very obvious, and so as 2009-2010. In 2007-2008, the M1 picture is less obvious as large IPO activities were happening in Hong Kong around that period, but the M2 picture looks very nice in that period. Similarly, in the only major correction in property prices in 2008 after Lehman Brothers went bust, we can see both M1 and M2 contracted before home prices declined.

When supply and demand are actually in equilibrium, it seems as though the property booms and busts in Hong Kong are purely monetary phenomena. At least after 2003, they are.